1979 (9) TMI 77 - HC - Central Excise

Manufacture - Change in physical form does not amount to manufacture - Synthetic dye stuff - Taxing provision - Burden of proof on the department

Issues Involved:

1. Liability of formulation of synthetic organic dye to excise duty under the Central Excises and Salt Act, 1944.
2. Determination of whether the process of formulation constitutes manufacturing.
3. Assessable value of formulations including post-manufacturing expenses and trade-discount.

Issue-wise Detailed Analysis:

1. Liability of Formulation of Synthetic Organic Dye to Excise Duty:

The primary question raised was whether the formulation of a synthetic organic dye into a liquid solution is independently liable to levy of excise duty under the Central Excises and Salt Act, 1944. The petitioners, manufacturers of synthetic organic dyes, contended that the formulation process, which involves adding dispersing agents or diluents to the dyes, does not change the dye's composition and thus should not attract additional excise duty. They argued that excise duty should only be levied on the synthetic organic dyestuff as per Item 14D of the Central Excise Tariff and not on the formulated dyes, as the formulation did not constitute manufacturing.

The appellate authority, however, held that excise duty was correctly leviable on Foron liquids, the form in which the dye was cleared from the factory, as it was different from the form in which the Foron pigment was manufactured. This decision was based on the observation that what was cleared from the factory was not Foron pigments but Foron liquids, and duty is chargeable on excisable goods at the time of their clearance from the factory.

2. Determination of Whether the Process of Formulation Constitutes Manufacturing:

The court examined whether the process of formulation of synthetic organic dye constitutes manufacturing, which would bring a new article into existence. The petitioners argued that the process of formulation is different from manufacturing and does not change the dye's composition or characteristics. They relied on a trade notice which stated that the conversion of "Vats, Powder" into "Vats, Paste" does not involve any chemical change and thus is not chargeable to duty.

The court referred to the definition of "manufacture" as considered by the Supreme Court in Union of India v. Delhi Cloth and General Mills Co. Ltd. and South Bihar, Sugar Mills Ltd. v. Tata Chemicals Ltd., which states that "manufacture" implies a change, but every change is not manufacture. There must be a transformation where a new and different article emerges with a distinctive name, character, or use. The court found that the Appellate Collector was under a misapprehension that the mere change in the state of the pigment to a liquid form by adding diluents and dispersing agents constituted manufacturing.

The court emphasized that the burden of proving that the formulation of Foron pigment into Foron liquid is a distinct commodity lies on the taxing authority. The court found no evidence from the Department to show that the dyestuff in the form of wet cake is not available in the market or that the addition of dispersing agents results in a new substance with new characteristics and use. The court concluded that the formulation process did not result in a new article having a distinctive name, character, and use, and thus could not be considered manufacturing.

3. Assessable Value of Formulations Including Post-Manufacturing Expenses and Trade-Discount:

Another dispute involved the determination of the assessable value of the formulations, specifically whether the petitioners were entitled to exclude post-manufacturing expenses and trade-discount from the selling price. The petitioners claimed that no credit was given for the excise duty paid on the dyes. However, during the pendency of the petition, the Appellate Collector of Central Excise decided that the principle relating to the deduction of post-manufacturing costs was in favor of the petitioners but found that they had not produced material to indicate the element of post-manufacturing expenses in the price-list declared by them. Consequently, the argument in the petition was restricted to whether the process of formulation can be said to be a manufacturing process.

The court, in its judgment, held that the conversion of Foron pigment into Foron liquid did not constitute manufacturing as it did not bring a new article into existence. The court quashed the orders and demand made by the Department and allowed the petition, stating that the bank guarantee given by the petitioners shall stand canceled and awarded costs to the petitioners.

Conclusion:

The court concluded that the formulation of synthetic organic dye into Foron liquid did not constitute manufacturing and thus was not liable to excise duty. The orders and demand made by the Department were quashed, and the petition was allowed with costs awarded to the petitioners.

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